Monday, January 7, 2013
As I have previously discussed, Congress and President passed a resolution, H.B. 8, that averted the fiscal crisis, that made the current estate tax rate permanent (indexed for inflation), and raised the estate tax rate to 40% on income that exceeds the exemption. I also discussed, how the gift tax and the estate tax exemption are still one unified credit and how the portability provision has remained intact. On the issue of the GST (Generation-Skipping Transfers) Tax, the exemption is the same as before and the rate has increased to reflect the estate tax exemption. Finally, the annual gift tax exemption has remained the same, only seeing an increase based upon inflation, at $14,000. The fiscal cliff bill also ensured that a taxpayer could still take a federal deduction if the taxpayer has to pay a state estate tax. The bill retained the old law, which states that "the federal government shared up to 16% of the tax that it levied with states."
While this is the basic framework, there could still be changes on the horizon that target not only the exemption but particular estate planning techniques. President Obama has stated that he would like to place some restrictions on estate planning techniques, "such as [GRAT]s, valuation discounts, [FLP]s, grantor trusts, and dynasty trusts." Even with the old, now permanent, estate tax exemption, many estate planning attorneys are compelled to remind everyone that this does mean that people should not talk to an estate planning attorney. There are a variety of aspects that involve a person's estate plan, including but not limited to the estate tax exemption. For estate planning attorneys and prospective clients, it is important to remember that permanent does mean that it can never change, it only means that there is no sunset provisions that provides a definite expiration date to the law. What people should take from this is that there is no better time than the present to speak to an attorney about estate planning issues. We can never know when Congress might change its mind.
As for the other tax issues raised by the fiscal cliff, the bill will decrease tax rates for taxpayers with a income of $400,000 or $450,000 for couples, but increase the tax rate those making above the threshold to 39.6%. The bill also limits the amount of itemized deductions a taxpayer with an income greater than $250,000, "$300,000 for joint filers, and $275,000 for heads of household" can take. The bill also provides an alternative minimum tax exemption for individuals at $50,600, and $78,750 for joint filers. The capital gains tax rate has increased to 20%, but only for those making above the $400,000 or $450,000 limits that I discussed earlier. Additionally, there is a new rule that allows taxpayers to convert any traditional 401(k) to a Roth 401(k), and allows seniors to take advantage of a charitable deduction that I discussed here.
See Hani Sarji, More Estate Tax Changes Could Follow Fiscal Cliff Deal, Forbes, Jan. 6, 2013.